Right, so Jeff Bezos asked Alexa to buy him something from Whole Foods and by virtue of not being a human, Alexa heard “buy Whole Foods.”
This is how it happened:
No but seriously, Bezos is trying to put grocery stores out of business. He’s a “greedy bastard,” just like those fuckers at Jana who are set to make like $300 million on Amazon’s acquisition.
And in case you missed it earlier this week, Bezos is a guy who can multi-task. See, while one hand is busy shoving brick-and-mortar grocers into an early grave, the other hand is putting the final nail in the coffin for department stores by launching “Prime Wardrobe”.
But here’s the thing you need to understand about Karen Short over at Barclays. She’s looked at this and from where she’s sitting, it’s entirely possible that Kroger or Wal-Mart tries to outbid Jeff for Whole Foods.
Specifically, she says those bids could be $50 or higher. Importantly, one of the reasons Karen thinks it makes sense for Wal-Mart to give it a go is because Godzilla vs. King Kong “is not only a theme but a reality.”
Based on ~$750M in synergies and various ranges on net debt/EBITDAR leverage, we believe KR and WMT could bid $50 or higher. While any list of potential acquirers is likely broader than just KR and WMT, we focus on these two retailers in this note since they are the two retailers investors have been the most focused on. We base our analysis on our current CY2017 estimates for both KR and WMT, and assume 300 bps of price investments (or $480M), no step up in D&A and a range of financing scenarios spanning 100% equity to 100% debt-financed.
1) No other U.S. asset gives AMZN access to the top 50 DMAs in the U.S. Said differently – while AMZN might be determined to acquire a bricks and mortar asset – WFM is the optimal solution for AMZN. All other assets are suboptimal by a wide margin – as a result – it is in any competitor’s best interest to bid for WFM to keep WFM out of AMZN’s hands.
2) Potential strategic bidders can rationally outbid AMZN based on synergies.
3) Our rationale for KR: a) we believe a 100% debt-financed bid at $50 could be +6.3% accretive, and a bid up to $60 would still be accretive; b) a transaction between KR and WFM would make strategic sense as it prevents an AMZN and WFM deal (which is a significant threat to KR) but; c) KR is strong in many areas where WFM is weak; and d) WFM is strong in areas KR is weak. Specifically, KR is strong at operating efficiently in a decentralized model; KR has best-in-class customer analytics. WFM is strong in prepared foods – a significant area of opportunity at KR. Lastly, while KR has consistently communicated a desire to maintain its investment grade rating. We believe the current management team would consider temporarily sacrificing it in order to complete a transformational deal.
4) Our rationale for WMT: a) we believe a 100% debt-financed bid at $50 could be +2.2% accretive – and a bid up to $70 would still be accretive; b) it would prevent WMT’s most formidable competitor – AMZN – from becoming even stronger in food; c) King Kong vs. Godzilla is not only a theme but a reality – never underestimate the competitive dynamics in this industry. Separately, WMT has shown a willingness to be aggressive as evidenced by its purchase of Jet, ShoeBuy, Moosejaw, ModCloth, Bonobos all within the last yr.
5) Why WFM wants to “marry” AMZN: Tinder analogies aside, a superior bid is a superior bid – and as stated in the Town Hall – the marriage has not yet been consummated. While we believe this transaction saves face for John Mackey by facilitating a graceful and victorious “exit” – shareholders’ come first.